China’s Welcome FDI

Reports that a Chinese buyer with ties to the Chinese Communist Party (CCP) is planning to acquire a large swathe of land in Iceland have rekindled the debate about Chinese foreign investment in the West. (In this article, the 'West' is defined politically to refer to countries that are part of the US-centric web of formal and informal alliances, i.e. including Japan, South Korea, and other nations that are not culturally western).

The arguments for welcoming Chinese foreign direct investment (FDI) and portfolio investment are straightforward: they promote growth. In addition, some theorists believe that these business transactions foster interdependence that makes conflict between China and the West less likely. Optimists, meanwhile, see Chinese overseas acquisitions as part of the transformation of the Middle Kingston into a pluralistic capitalist society.

The economic argument is the most convincing. If Chinese investment is productive, it’s good for the receiving economy. If it’s a money-losing proposition, it benefits the foreigners (Americans, Europeans, Japanese, etc) who sold them over-priced assets in the first place.

The interdependence hypothesis lacks empirical evidence to support it. Nations go to war against each other despite mutually beneficial economic ties. Financial markets, some have argued, strengthen integration and interdependence, but the pre-World War I Bank of England-centric world of finance was even more integrated than today. Most civil wars occur in economies with single markets, and closer cooperation between government ministries and regulatory agencies fuelled by transnational investment are equally unlikely to bring peace.

In the end, countless conflicts, such as the US Civil War, the two world wars, the Falklands invasion, and the Wars of the Yugoslav succession demonstrate the primacy of politics over economics. Nothing, even personal connections and the love of money, can keep the dogs of war on a leash. Southeast Asia is an interesting example. Singapore is simultaneously highly integrated in all fields with its neighbours and armed to the teeth. Clearly, its high IQ rulers, trained by the Ivy League, believe in the old Roman wisdom of si vis pacem para bellum.

But this in itself isn’t an argument against Chinese FDI. Investment doesn’t foster peace, but neither is it a prelude to war. Thinking that Chinese forays into overseas acquisitions (and business in general) will bring about democratic liberalism is an interesting proposition. But since China is the first communist nation to embark on this path, there’s no historical evidence we can refer to. Nor does any credible theory indicate that a post-Communist Party China will necessarily be a liberal democracy.

On the opposite side of the debate, the case against Chinese investment rests on national security grounds. China has demonstrated in recent years an aggressive posture against its neighbours and numerous Western nations. This doesn’t indicate that conflict is certain or imminent, but it should worry Western allies. Chinese ownership of technology assets could strengthen China’s military might, while even things as benign as real estate or low-tech manufacturing could serve as a beachhead for Chinese interests and intelligence gathering.

Yet even if one accepts that the Chinese Communist Party has belligerent designs, restricting Chinese investment in the West would generally be counter-productive.

From an economic perspective, it would hurt the economy of receiving nations by depriving them of investment, while at the same time opening the floodgates of protectionism. Any business threatened by competition would find a Chinese connection (real or imagined) and appeal to ‘national security’ to hinder competition. It would essentially run against efforts to liberalize trade and investment regimes.

Moreover, Chinese investment abroad can actually contribute to national security. It provides intelligence agencies opportunities to study a country that remains, by Western standards, fairly closed. With investment come expatriate managers, and in the case of large acquisitions and projects, there are well-connected senior executives with strong party connections involved. Gathering information, not only on them but also on all their contacts at home as well as on their family and friends, is vastly easier if they live and work in Australia or Europe than when they work in China. This can help Western governments gain a better understanding of the workings of a potential adversary.

In some cases, these expatriates might be recruited to spy on their own country. But in any case, many of the children of these Chinese temporary residents will remain in the West for their university education even if their parents return home. This is particularly likely when the family is stationed in English-speaking societies. This offers further possibilities for Western governments to observe the Chinese elite. Smart college students with good social connections generally mature into successful and influential adults. As such, they are particularly attractive intelligence targets, as communist spies operating in Britain between the wars realized to the immense benefit of the KGB during the Cold War. The bright and well-connected men they recruited at Cambridge in the 1930s served the Soviet Union for decades.

Meanwhile, the more Chinese corporations operate in the West, the easier it is to observe them (with overt and covert means) to decipher their inner workings and those of the Communist Party to which they have close relations. This is particularly useful in the case of businesses such as telecommunications, natural resources, and advanced manufacturing that have a high national security content and are especially close to the party-state apparatus and vital to China’s economy and military power.

Real estate is another area that provides opportunities for the West. Though obviously there are no available statistics, one has to assume that many Chinese who have bought apartments and houses in North America, Australia, Europe, and Japan, are equally concerned with their exit strategy as they are with enjoying the pleasures of a nice home. A few probably earned their money through corruption, and while most may be perfectly honest, they still fear that there may be a time when they could run afoul of powerful party officials (or they may simply expect significant political upheaval at home). These are the sorts of Chinese nationals who can be useful to intelligence agencies. Gathering information on them, and possibly recruiting them, is easier if they are in their Vancouver mansion or New York flat than if they remain in Beijing or Shanghai. Those who have acquired these assets as a result of shady activities in China may be particularly vulnerable to blackmail (especially as in today’s non-totalitarian China, it takes only a few click of mouse to expose them on the Internet).

Finally, in case of conflict, assets can be easily expropriated without compensation. For example, some of the United States’ pharmaceutical industry traces its roots to German properties in the United States that were seized without compensation following the US entry into World War I. In the case of a catastrophic breakdown in relations, the nation where the assets are located not only obtains the proverbial cake, but also gets to eat it.

There are surely areas where it would be unwise to let Chinese enterprises make acquisitions, but these seem few and far between. In these cases, firewalls can be built when there are legitimate national security issues (such as divestitures, controls over technology flows, citizenship requirements for key employees and managers). But in general, the West should look forward to Chinese investment. If anybody should be worried, it is the Communist Party of China.

Robert Dujarric is Director of the Institute of Contemporary Asian Studies at Temple University, Japan.